This isn't anything I'm really familiar with myself. I've done some basic
programming with the Graphics2D object, images and transforms etc. but not a
lot. I don't know if these links are of any use to you, they are some I filed
away for myself, if you haven't looked through them yet they could provide some
insight:

http://java.sun.com/docs/books/tutorial/2d/index.html
http://www.apl.jhu.edu/~hall/java/Java2D-Tutorial.html

Graphics and Graphics2D should be thought of as the paint brush with
which you draw on Images, BufferedImages, Printers, etc.  If an object
is something to draw on, you will be able to get a Graphics/2D object
for it.

If you load an image that has transparent pixels, when you draw that
image on top of another image, the first image will show through the
transparent pixels.  There are numerous other ways to make drawings or
images transparent (see AlphaComposite).  Color objects can be created
with transparency too.  Below I create a BufferedImage, draw translucent
yellow pixels on the entire image.  In the paintComponent(), where all
drawing on the component must take place, I draw a red and blue X on the
component and then draw the BufferedImage with its transparent pixels
over the top.  The is just one simple way to do this sort of drawing.

import java.awt.*;
import java.awt.image.*;
import java.awt.event.*;
import javax.swing.*;

public class test extends JPanel {
    BufferedImage bi = new
BufferedImage(400,300,BufferedImage.TYPE_INT_ARGB);

    public test() {
        setPreferredSize(new Dimension(400,300));

        // draw translucent yellow on the buffered image
        Graphics2D g = bi.createGraphics();
        g.setColor(new Color(255,255,0,180));
        g.fillRect(0,0,bi.getWidth(),bi.getHeight());
    }

    public void paintComponent(Graphics g2D) {
        Graphics2D g = (Graphics2D)g2D;
        // draw blue and red X first
        g.setColor(Color.BLUE);
        BasicStroke bs = new BasicStroke(20.0f);
        g.setStroke(bs);
        g.drawLine(0,0,getWidth(),getHeight());
        g.setColor(Color.RED);
        g.drawLine(getWidth(),0,0,getHeight());

        // draw translucent image
        g.drawImage(bi,0,0,null);
    }

    public static void main(String[] args) {
        EventQueue.invokeLater(new Runnable() {
            public void run() {
                JFrame f = new JFrame();
                f.setDefaultCloseOperation(JFrame.EXIT_ON_CLOSE);
                test t = new test();
                f.add(t);
                f.pack();
                f.setVisible(true);
            }
        });
    }
}

OK, I'm getting close, but I seem to be missing something. I've
included my code so far. I know it's a bit messy, but I'm still
learning to tighten up java code. This is a proof of concept for me.
It achieves something similar to what I wanted to do originally. I
currently have the program draw an oval (circle) where the mouse
clicks. That's enough to let me see what happens real-time.
Eventually, I'll have the reveal "expand" from the point where the
user clicks.

Anyway, drawing an expanding oval or box isn't the problem. This
example takes one image file (revealArea) and is supposed to overlay
it on another image file (baseImage). I expected to be able to click
in the window and wherever my mouse is, an oval will "paint a hole"
into the revealArea image, exposing part of the baseImage below.

I currently have the code of the revealArea image commented out. In
lieu of that image, I simply draw a white filled rectangle to
substitute. The rectangle overlays the base image fine (as witnessed
from the flicker). Drawing the oval does something unexpected. I set
the paint color to blue with an alpha of 30. I tried an alpha of zero,
expecting the hole to appear. When I click in the window, I get a
translucent blue circle blended with the white rectangle and not the
"hole" I expected to be formed. Is there a way to "paint" the hole?
Also, what techniques can I use to avoid the flicker of the images
drawing over one another?

Thanks!

-----------------------
import java.applet.*;
import java.awt.*;
import java.awt.event.*;
import java.awt.image.*;
import java.lang.Math;
import javax.swing.*;
import javax.imageio.*;
import java.io.*;

public class Reveal extends Applet
  implements MouseMotionListener {

  int width, height;
  int mx, my;  // the mouse coordinates
  Image baseImage;
  Image revealArea;
  Image backbuffer;
  BufferedImage revealBuffer;
  Graphics revealOverlay;

  public void init() {
     width = getSize().width;
     height = getSize().height;
     setBackground( Color.black );

     mx = width/2;
     my = height/2;

     baseImage = getImage( getDocumentBase(), "baseimage.gif" );
     revealArea = getImage( getDocumentBase(),"overlay.gif");

     revealBuffer = new BufferedImage(100, 100,
BufferedImage.TYPE_INT_ARGB);
     revealOverlay = revealBuffer.getGraphics();
     revealOverlay.fillRect(10, 10, 80, 80);
     //revealOverlay.drawImage(scratchArea, 0, 0, 100, 100, null);

     repaint();

     addMouseMotionListener( this );
  }

  public void mouseMoved( MouseEvent e ) {
     repaint();
     e.consume();
  }

  public void mouseDragged( MouseEvent e ) {
     int x = e.getX();
     int y = e.getY();

     revealOverlay.setColor(new Color(0, 0, 255, 30));
     revealOverlay.fillOval(x-5, y-5, 20, 20);

     repaint();
     e.consume();
  }

  public void paint( Graphics g ) {

     g.drawImage(baseImage, 0, 0, null);
     g.drawImage(revealBuffer, 0, 0, null);
  }
}